Public Bill Committee

[Mr Edward Leigh in the Chair]

John Hayes: On a point of order, Mr Leigh. There were queries this morning from Members about the availability of information on the Department of Energy and Climate Change website. My officials have worked assiduously during their lunch break to provide the information for us. I am pleased to confirm to the Committee that all Bill documents are now available on the Energy Bill webpage. The link to that page is immensely long; if I were to read it out, though it would show that I was in touch with the zeitgeist, it might risk boring the Committee, so I will simply say that we are sending the details to all members of the Committee as I speak.
I appreciate that the situation has not been ideal, but we have worked quickly to bring things into order, and, as I say, to celebrate the wonders of modernity and new technology, all Committee members will have received an e-mail from the Department containing the link. I apologise. We will ensure that it does not happen again.

Clause 7 ordered to stand part of the Bill.

Clause 8  - Application of sums held by a CFD counterparty

Amendment proposed: 49, in clause8,page6,line4,leave out
‘or not to be paid, into the Consolidated Fund’ and insert ‘to consumers’.—(Tom Greatrex.)

Question put, That the amendment be made.

The Committee divided: Ayes 8, Noes 10.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: I do not want to detain the Committee for too long, as we have already debated amendment 49 to the clause. I want to make a couple of points, and to ask the Minister for some details. In particular, I want to ask about the provisions in the clause for apportioning sums, and how that will be undertaken. Obviously, we know the provisions will be subject to regulations. Is the Minister able to provide the Committee with some guidance on the Government’s intention to allow the counterparty to make payments to generators on a pro rata basis? How is that envisaged at this stage and how would it work in practice? For example, would generators receive an amount relative to the value of their contract for difference? If there were 10 generators, would they each receive different proportions of the moneys held by the counterparty according to the value of the CFD?
As we do not have draft regulations to look at, will the Minister set out in a little more detail the criteria for how the pro rata allocation of counterparty funds would operate? The policy documents note that the counterparty would later request amounts to recover and so make good the accrued shortfall. As I understand it, the amounts will be requested through the supplier obligation, but will the Minister set out what the process will be for recovering those sums, and how he envisages that that will be the case? If the supplier that has originally defaulted is still unable to pay the sums requested, would the shortfall be made up by other suppliers and, if so, would that be on the basis of market share or other criteria?
Those are important points. I understand that there will be ongoing discussion with the industry about them. However, in the absence of draft regulations, it would be helpful if the Minister set out the Government’s intention in dealing with those significant issues in which there is a degree of interest.

John Hayes: This part of the Bill is central to the integrity of the regime. It is critical that the CFD counterparty is protected from any undue insolvency claim from a generator that could threaten the viability of the company and its functions for other generators. Let me clear about the process. The current heads of terms of the CFD contract set out that the obligation on the CFD counterparty to make payment under the CFDs will be conditional on its having received payment under the supplier obligation. Its immediate liability will therefore not exceed the amount it has received under the supplier obligation in respect of the contract.
In the event of a CFD counterparty having received insufficient amounts under the supplier obligation, and assuming that, unusually, there is insufficient supplier collateral—we spoke of collateral earlier—that can be accessed to make up the shortfall, the CFD counterparty would make payments to generators pro rata to spread any shortfall evenly across CFD generators, in proportion to what they are owed in the relevant payment period. In other words, equal shares relative to the total owed in the period, to answer the specific question raised by the hon. Member for Rutherglen and Hamilton West.
In subsequent periods, the CFD counterparty would be obliged to recover and so make good any shortfall to generators accrued under the CFD contract. A clear position on the method to apportion payments from suppliers to generators cannot be achieved merely through the contract for difference itself, as it involves the interests of more than one generator, which was the point the hon. Gentleman alluded to. Setting the rules out clearly in regulation, as he also mentioned, will give generators certainty over how the assessment of pro rata payments will work, minimising the risk of dispute. As I described, it will be in proportion to the total owed.
Subsections (3) and (4) have a different purpose, which we discussed largely when we talked earlier about the collection of moneys and the role of the Treasury in that respect. With those remarks of clarification, I propose that clause 8 stand part of the Bill.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.

Clause 9 ordered to stand part of the Bill.

Clause 10  - Functions of the Authority

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: Like the previous two clauses, this is relatively uncontentious. It gives the Secretary of State the power to confer
“functions on the Authority for the purpose of offering advice to, or making determination on behalf of, a party to a CFD.”
I would like to tease out a little more detail on the advice or determinations envisaged under the clause, and any extra resource required to allow the authority to carry out this important function.
The Minister is aware of the Opposition’s position on the authority. It is no secret that we have concerns about the performance of the regulator and the way it has undertaken its role up to the present day. I am sure that all Committee Members are aware of our position and we will discuss it later. Rather than get into a lengthy debate about the merits of Ofgem just now, I want to ask about the preparedness of Ofgem as currently constituted to carry out the functions ascribed to it under the Bill.
The role of Ofgem is important. According to annexe D published alongside the Bill, Ofgem will be responsible for overseeing and managing the performance of the system operator. It will be able to take enforcement action in the case of a licence breach, or the breach of a relevant requirement, and set financial rewards to incentivise efficient performance. The regulator will also have the important responsibility of setting revenue controls for the system operator. Last year I asked the Minister’s predecessor what assessment he had made of the number of Ofgem staff between then and 2020. On 14 June 2012 I received a response from Charles Gallacher, the director of GB external relations at Ofgem, who wrote that the impact of the Government’s electricity market reform and off-generator resourcing was yet to be fully determined. Therefore, as this policy was still in development, they had not made any projections of the impact of the EMR proposals on Ofgem’s staff numbers in the years to 2020.
I was slightly surprised by that response, given that by that point the draft Bill had been published. Can the Minister provide any update on whether an assessment has been made of the impact of the Bill’s proposals on Ofgem and whether it will require more staff? Are the functions that are being conferred on Ofgem similar to those that are already carried out? Is it his view that it would make little difference? I appreciate that these are points of detail, but they are important and significant. I am not asking him to denigrate the regulator but simply to confirm that in his opinion the regulator will be able to carry out its important functions under electricity market reform.

John Hayes: It is important to understand Ofgem’s role in this respect. Ofgem certainly needs functions conferred on it to carry out this role. Such functions will be conferred by order, as the shadow Minister will understand, and will be designed to reflect the CFD contract. It is fair to say that Ofgem’s role will be limited. Its role will be only as set out in the contracts. It does not have a more permissive role. It is playing the role of an independent expert in relation to highly specified matters in the contract. I take the hon. Gentleman’s point about not getting into a wider debate about the role of the regulator. His point about the likely costs in relation to that is a reasonable one. It is certainly one I want to say more about. I do not have that information to hand, but it seems to be a valid question and I will come back to the Committee, if necessary in writing, or in a later sitting. I will be happy to make any information that we have available.

Albert Owen: Is the Minister as concerned as I am that when Ofgem carried out the retail market reform there were huge delays? One of the reasons cited was the amount of work that they had to do. That obviously relates to their resources. Is he concerned that much of this may be delayed if those additional resources are not available?

John Hayes: That is a perfectly fair point. Because of the particularity of the role they were playing here, we can be confident that the delays that the hon. Gentleman suggests are extremely unlikely to occur, but it is right that we give proper assurance about any additional costs. Ofgem already has a responsibility in respect of biomass certification under—

Sitting suspended for a Division in the House.

On resuming—

Edward Leigh: Before we were interrupted by the process of democracy, the Minister was in mid-flow, and we were very attentive.

John Hayes: That is most generous of you, Mr Leigh. I was about to make the case that this measure is an extension of Ofgem’s existing competences. It currently has a responsibility to enforce licence conditions and to continue biomass certification under the renewables obligation, so this is a marginal addition to what Ofgem does. We are discussing the issue with Ofgem, which is an integral part of the EMR governance framework—in other words, our EMR steering board. I emphasise that things that the shadow Minister mentioned from annexe D of our policy update are all part of Ofgem’s role in overseeing the systems operator. I reinforce the point that any addition would be absolutely marginal, given that it is an extension of what Ofgem already does. With that reassurance, I beg to move that the clause stand part of the Bill.

Question put and agreed to.

Clause 10 accordingly ordered to stand part of the Bill.

Clause 11  - Regulations: further provision

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: Clause 11 gives the Secretary of State tight control over the actions of the CFD counterparty. The power under the clause is very broad and wide-ranging, as essentially the Secretary of State can require a counterparty to do anything, or prevent it from doing anything, that he or she wishes. For example, subsection (1)(b) states that regulations may make provision
“specifying things that a CFD counterparty may or must do, or things that a CFD counterparty may not do”.
Page 15 of the explanatory notes gives an example of how the power could be used, stating:
“This clause enables the regulations to make provision about the control of the behaviour of a CFD counterparty. This may be used, in particular, to make it clear that the CFD counterparty cannot vary a CFD without consultation with, or the consent of, the Secretary of State… This provision only regulates the behaviour of the CFD counterparty and does not enable the Secretary of State to vary any CFD without the consent of the generator in question.”
The message from the Government appears to be that investors need not be concerned because changes will not be sprung on them by the counterparty or the Secretary of State. Annexe A, which is published alongside the Bill, states:
“Investors and developers will be concerned that long-term price certainty is not undermined by legislative and regulatory changes that target CfD generators, either individually, by technology type or because a generator holds a CfD…Therefore, in addition to providing long-term pricing certainty, investors will be provided with a degree of protection against certain changes in law and regulation.”
As reassuring as those words may seem, they have not satisfied all the industry. The Minister will be aware that SSE has raised concerns about the very broad powers that the Bill gives the Secretary of State. In the written briefing it sent in advance of Second Reading, it noted:
“The Bill grants the Secretary of State considerable power in all parts of the market but has limited detail about how and when these powers will be used. The provision of delegated legislation for the CfDs, the capacity market and liquidity, and the lack of Parliamentary debate, are destabilising to investors and create uncertainty regarding the UK energy market.”
The Minister, as well as other members of the Committee, has said several times that we would wish there to be the minimum amount of uncertainty for investors, for the very good reasons that we discussed earlier this week regarding the impact that that has on risk, and therefore the cost of capital and, eventually, the costs borne by consumers, be they business or residential. Although we may be rectifying at least one of SSE’s concerns—that relating to parliamentary debate—other significant concerns remain.
Such concerns were further emphasised during our evidence sessions. Members will recall that Professor Dieter Helm gave us interesting evidence. He outlined his concern about the latitude that the Bill gives the Secretary of State, as did Keith McClean from SSE, who said of various powers in the Bill:
“They are so widely enabling that they allow anything to be done anywhere at any time for eternity. That is a real concern because it means that, even if a sensible reform were made, the powers in the Bill will remain there for other reforms to be made in the future.”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 88, Q259.]
In written evidence to the Energy and Climate Change Committee, RWE also noted its concern:
“Powers are for very broad purposes and are not defined by reference to specific objectives.”
We have suffered bad weather in recent weeks—snow has fallen, as have the temperatures. Last weekend, some of us were unfortunate enough to get stranded in London. I was unable to return to my constituency, so I spent some time looking through the Bill in a little more detail than I had envisaged would be the case. I counted up the number of times the phrase
“the Secretary of State may”
appears in the Bill. According to my sums—and I am not a mathematician, so I got the House of Commons Library to check my figures—the phrase appears 57 times in the main body of the Bill and a further 17 times in schedules, meaning that the Bill gives him a total of 74 new powers. I was quite conservative in my definition of new powers, however, and there may well be other provisions with slightly different wording that give him new powers. However, the point remains that the Bill gives the Secretary of State a significant number of new powers, and they are very widely drawn.
In many respects, this is a framework Bill that sets out where regulations will be put in place. I understand that those regulations will include further detail, but as we are scrutinising the Bill, I want to press the Minister on the impact of the powers—I cited the example of that under subsection (1)(b)—on investor uncertainty, given the potential for policy changes at short notice. I am not making a particularly partisan point, but every now and then we see changes in Government policy—people sometimes describe them as lurches or U-turns—and they can be significant.
As we have discussed several times, the Bill is about the long term and long-term investment, so will the Minister give the Committee some reassurance about how the Secretary of State will use the broad powers in clause 11, as well as those under other provisions? Although flexibility is necessary under the Bill and the regulations that will come from it, what checks are in place to ensure that people do not end up investing significant amounts of money—in some cases, that money will come from consumers in the first instance—in projects that might be undermined by changes that are subsequently made outside primary legislation? Will the Minister give us a little more detail about subsection (1)(b) and respond to my general point about the wide-ranging powers in the Bill?

Barry Gardiner: I rise to reinforce the remarks of my hon. Friend about clause 11, because the Government seem to have created a lovely loop for themselves. The clause specifies that regulations “may make provision”, and those provisions then confer on
“the Secretary of State further powers to direct a CFD counterparty to do, or not to do, things specified in the regulations or the direction.”
I must confess that this is the first time I have seen such a spiralling; it is almost pulling oneself up by one’s boot straps. The clause puts into secondary legislation the sort of provisions one would normally wish to see in primary legislation. It confers within regulation the power to confer on the Secretary of State further powers. That is a neat way for the Government to appropriate to themselves quite unimagined powers that will not have to be scrutinised by parliamentary colleagues. Given the 57 powers in the main body of the Bill and the 17 powers in the schedules that the Secretary of State is being granted, the Minister needs to justify this instance, because this power to confer powers is completely unsupervised and unlimited.

John Hayes: In your absence, Mr Leigh, while Mr Bayley was chairing the Committee, the hon. Member for Brent North compared me with Henry VIII, whom the Venetian ambassador described as the “most accomplished prince” he had ever seen of all the sovereigns he had visited. He was referring particularly to Henry’s fine calf and his princely aspect. Let me start, therefore, by saying that there are only three Henry VIII powers in the Bill—in clauses 26, 30 and 54. Moreover, generators’ contractual rights cannot be affected by those powers, and there no powers to vary or terminate a CFD, except in accordance with its own terms.
There is a certain irony in the shadow Minister’s criticism of these specific powers because they are there to ensure the transparency of the counterparty body, to define carefully and openly its function and purpose, and to limit the scope to apply controls and constraints on the counterparty body. The powers to use regulations are not being taken in a way that allows us to be permissive in terms of the Government or counterparty body’s further development; they are taken to be specific, clear and transparent about the counterparty’s role to ensure that it works alongside the Government and the national system operator to deliver contracts for difference.
Dr Johnson said:
“Kindness is in our power, even when fondness is not.”
I am growing increasingly fond of the shadow Minister, and that worries me, because it may blur me to the clarity of the argument that I need to make. In this case, however, I am clear that he is wrong and I am right. The powers are for a particular and specific purpose. They are not meant to be permissive. They are not meant in any malevolent way, and they could not even be used in such a way, because of the nature of the Bill and its relationship with the Government’s roles with the counterparty.
Let me give just one example, because I do not want to linger on the point. Under the CFD contract, there will be provisions relating to the termination or variation of the contract under certain circumstances. The clause enables the Government to frame the counterparty’s decision making through regulations to ensure that it acts entirely appropriately when taking such decisions.
Similarly—I have one more example, but I must then conclude—when settling claims or in the conduct of legal proceedings relating to contracts, there may be a need for the counterparty to consult the Government on some matters. The clause provides for the Government to set out through regulations a transparent framework for the governance and accountability of the counterparty so that they can establish any necessary controls around how the counterparty exercises discretion or makes decisions under the contract.

Barry Gardiner: I am listening carefully to the Minister, but the fact is that subsection (2) states that provision
“made by virtue of subsection (1)(b) or (c) includes provision requiring consultation…in relation to”
the list in subparagraphs (a) to (e). However, that does not preclude any other powers. I am not satisfied that the Minister is right in his interpretation that there is no bootstrapping power here, because regulations may make provision conferring further powers on the Secretary of State that are not then prescribed under subparagraphs (a) to (e).

John Hayes: I have two points about that, both of which are straightforward. First, the hon. Gentleman has served on many Bill Committees and understands the legislation well, but were we to preclude everything that the Secretary of State could not do to constrain the counterparty, the Bill would be endless. He quotes the Bill’s specific provisions entirely accurately, with his usual eye for detail, but subsection (1)(c) is there simply to allow the Secretary of State to make directions in relation to things that a counterparty must do, or ways in which it should behave in relation to a contract. That is a specific power for a specific purpose, and it is described as such in the Bill.
Secondly, when Governments take power through legislation, that can, as the hon. Gentleman perhaps implied, be something about which the House might have concern—that is absolutely right. Oppositions make that point entirely properly, and I made it myself when I was a shadow Minister. However, there are other times when Governments take power precisely to limit what they or another agency might do, and to constrain a function, or to make it clearer or more transparent. In this case, I believe that the powers fall into the second category.

Question put and agreed to.

Clause 11 accordingly ordered to stand part of the Bill.

Clause 12  - Enforcement

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: I seek clarification on one point. We welcome the Bill because it is right that the regulator can act on breach of CFD operations by suppliers, and enforce the functions of the system operator. Will the Minister explain why the explanatory notes refer only to licence modifications to enforce suppliers’ obligations? It is obviously welcome that suppliers are forced to meet their obligations, but I am not clear why generators are not included. Generators are key players in CFDs and also have obligations to meet, just as suppliers and the counterparty do. I should be grateful if the Minister will clarify whether the enforcement provisions are applicable to generators and suppliers and that it is just not covered in the explanatory notes, or that they are applicable exclusively to suppliers, in which case perhaps the Government will wish to look at the matter again.

John Hayes: The clause simply enables the obligations of suppliers to be enforced by Ofgem in Great Britain and the Authority for Utility Regulation in Northern Ireland Authority in Northern Ireland as if they are relevant requirements. That means that a breach of the supplier obligation can be treated, in effect, as if it were a breach of a licence condition, allowing the enforcement authorities to obtain an order to secure compliance, and/or to impose financial penalties.
The clause also enables the system operator’s functions to be enforced by Ofgem, which will ensure that there is an effective enforcement mechanism in place to enable the performance of the delivery body to be monitored, as well as ensuring that suppliers are properly incentivised to comply with their obligations to the CFD counterparty.
The clause is a technical one, and deals specifically with the point in the hon. Gentleman’s intervention. He makes a fair point. Generators’ rights and obligations are governed by private law contracts. We sit outside and alongside this. I understand the hon. Gentleman’s point, but there is separate provision through those private law contracts to enforce effectively what this part of the Bill expects of suppliers.

Question put and agreed to.

Clause 12 accordingly ordered to stand part of the Bill.

Clause 13  - Order for maximum cost and targets

Michael Weir: I beg to move amendment 12, in clause13,page8,line14,at end insert—
‘(d) the costs of delivering the energy to the grid.’.
I am pleased, Mr Leigh, to serve under your chairmanship this afternoon. The purpose of the amendment is to seek further clarification of transmission charges and how they will be dealt with in the CFD regime. This is an issue that I have pursued during the whole of my time in the House and I could speak for hours on the topic, but I assure hon. Members that I will not.
Although progress has been made of late, issues remain that will have an impact on reform of the electricity market. As hon. Members know, much of the renewable energy potential is in areas that are not adjacent to larger centres of population, and the costs of accessing the grid and transporting power have been a serious issue affecting renewable generators in particular, although it is a problem for any generators situated in more remote areas.
Ofgem has long championed a locational approach, so that generators were near centres of population, and many of us proposed a postage stamp or socialised approach that spread the cost equally. Its recent Operation Transmit looked at the issue and proposed a compromise system that moves away from a purely locational approach, recognising that the current system is not aimed at delivering an energy mix with a high level of renewables. At the same time, the Scottish Government in particular have accepted a move from a purely socialised approach, recognising that there must be a balance between fairness to generators and costs to consumers. Indeed, a rare degree of consensus has broken out, and that should bring down the costs of renewable generators on the Scottish mainland. However several issues remain. The Scottish islands have a huge renewable potential, but face the greatest costs.
The clause refers to the location of generation, which could impinge on the matter, but I would like some assurance from the Minister about how the issues are to be tackled as we move from ROCs to CFDs. There will be an impact, because CFDs will ultimately be decided by market price, and the cost of transporting energy is a significant part of that for renewable generators. What thought has been given to the design of CFDs with reference to the Scottish islands?
Ofgem indicated that it will not seek the integration of the Scottish islands in the GB network, but that it will investigate aspects of island charging and press UK Ministers for more action to reduce or cap island charges. I understand that the Scottish Energy Minister and representatives from the island councils have been actively pursuing the matter with Ministers. Has the Minister discussed the issue with Ofgem? When does he expect to introduce specific proposals, and does he intend to do so via primary legislation, or in one of the many pieces of secondary legislation that will follow from the Bill? It has been suggested that there should be a proposal for specific caps on CFDs in respect of island generation. Is that suggestion actively being considered? Is a proposal likely to be introduced and, if so, in what time scale?
There is also the connected issue of how high-voltage direct current converter stations are to be treated within the charging regime. As they form an integral part of the grid, it seems that the best solution would be to spread the cost across all network users, but Ofgem seems to suggest that it is a matter for the industry. Can the Minister give any indication of current thinking as to how the issue might be dealt with?

John Hayes: As the hon. Member for Angus said, the amendment relates to the costs of building and maintaining the transmission network, and the associated charges on generators, in which I know Members have keen interests.
The clause allows the Secretary of State to set targets requiring the system operator to issue particular proportions of CFD support to particular types of generation. The Secretary of State could use them to address market failings in particular areas where evidence suggests that is required. The principal aim in seeking the powers was to facilitate a move to auctions, to enable the system operator to run such auctions in line with such targets.
The amendment does not add to the powers already outlined. If there was a need to include targets for the costs of energy to the grid, subsection (1)(c) can already be relied on to achieve that. Changes to the charging regime recommended by Ofgem mean that an intermittent generator will in future pay less than a baseload generator in the same location. National Grid and the Connection and Use of System Code industry group are currently—

Edward Leigh: Mr Weir, can you follow this? Is it too fast for you? Perhaps the Minister could make some effort to try to address the audience rather than just read from the sheet.

John Hayes: I apologise.

Edward Leigh: Yes, I think Mr Weir deserves a proper answer.

John Hayes: Yes, I will give the hon. Gentleman a proper answer. I would not want to do anything less.
As I was saying, the National Grid and the Connection and Use of System Code industry group are currently developing the detail of the changes recommended by Ofgem. It is true that there are concerns about the economics of renewable generation in the more remote parts of the United Kingdom because of the distance from the transmission system. That applies to a range of areas, not just in Scotland but elsewhere. The matter has been raised by Members over some time. It is also true that the transmission charges are an important part of the total cost of providing energy and they are, therefore, reflected in bills; Members will be well aware of that. We recognise, however, the potential for energy generation in the parts of the country where the issue is of particular concern, and we are keen to unlock potential where we can.
A number of underlying factors make the transmission links expensive, and we are considering them closely at the moment. The hon. Gentleman might know that we are looking at a project that will consider that precise issue, and the whole value for money argument. There must, of course, be a balance between the opportunity and its cost, and that is precisely what we are considering.
I am not of the mind that we should set specific generation targets on the basis of the cost of delivering energy to the grid. That would risk distorting market circumstances in an unhelpful way, because it could reduce the funding available for elsewhere. While I am sympathetic to the hon. Gentleman’s arguments about the cost of transmission, distorting the levelised cost of generation would be both challenging and probably undesirable.
It is important to monitor the situation closely and I, of course, commit to do that. However, I am not sure that the amendment is the best way forward, given that we are considering matters closely, receiving representations from Members from around the kingdom and that we are mindful, as I have already described, of the scale of the opportunities.
 Albert Owen  rose—

John Hayes: I happily give way to the hon. Gentleman who will, I know, want to make a case for his part of the world.

Albert Owen: I certainly want to make the case in general. As the Minister indicated, peripheral areas of the UK are affected by the proposal. The hon. Member for Angus asked, and I have not heard a reply, about conversion from DC to AC, convertors and the cost, which inhibits a lot of projects in remote and peripheral areas. Today we heard an announcement that the Government are involved with the Irish Government in a big subsea transmission, yet the Bill does not really cover subsea for the next generation of market reform in this country.

John Hayes: That is an interesting point. The hon. Gentleman is right about the potential of the Irish connection to which he refers. He has made a strong case in the House previously and we have discussed these things, as he knows, for his own part of the country. His constituency has great potential but, like other places, faces challenges. Trading power with Ireland could certainly increase the amount of low-carbon generation in our energy mix. I think the hon. Gentleman would be the first to acknowledge that. It could potentially bring down costs for consumers, something which has understandably been raised by Opposition Members. I do not want to prejudge the detail, but certainly the memorandum of understanding marks the continuation of the close relationship we are developing to explore that potential of energy trading.
The question at the heart of the debate is who will bear the cost of that kind of interconnection. That is an important part of what the Ofgem integrated transmission planning and regulation project is considering. If domestic and foreign projects compete in a CFD auction, it is important that they do so on a level playing field, considering the implicit significant network costs.
This is a challenging issue; it should not preclude, however, the opportunities that I mentioned earlier. It needs to be done in a way that does not displace or distort the market, because that could happen unless we are careful. It is part of our continuing work in the Department and part of the work we are doing with Ofgem. The hon. Gentleman will know that we are also having discussions with representatives from different parts of the kingdom.

Michael Weir: I am listening closely to the Minister. I draw his attention back to clause 1, which sets out the duties of the Secretary of State in relation to climate change targets. The generation of renewable energy is an important part of meeting those climate change targets. If we do not sort out the difficulty with transmission charges, it will distort the ability to meet those targets. It is an important and integral matter that must be tackled when moving to CFDs, but the Minister is not giving much indication that it is being actively tackled in his Department at the moment.

John Hayes: That is an excessively harsh criticism, if I may say so. Of course, we take the view that renewable technology and low-carbon generation is an important part of the energy mix that we think is necessary to provide both resilience and sustainability. I entirely share that view. The amendment is not about the broad issue of the significance of renewable energy, but the specifics around transmission. Part of the challenge in developing our strategy is to take account of the different component parts that add to cost and to determine where those costs are borne and how they should be allocated in the system.
In the specific case of the more remote parts of Scotland, let me be clearer because it may have been my lack of clarity that led to the hon. Gentleman’s excessively harsh criticism; I am quite prepared to plead guilty in that respect. The coalition Government have set up an independent study into the progress of renewable projects in Scotland—the Scottish islands in particular. The work will be led and advised by a steering group chaired by DECC, with representatives from the devolved Government, the island councils, Highlands and Islands Enterprise, SHE Transmission, National Grid and Ofgem who will participate as an observer. The independent study will look at the cost of transmission, and also more broadly. It will examine the economic value and commercial viability of renewable projects on the Scottish islands and identify potential barriers to the development of renewable projects.
What criticism could be made of a Government who take matters so seriously that they are addressing specific concerns in the interest that the hon. Gentleman made clear he shares? I hope that the hon. Gentleman will support us, add his voice and acknowledge that the Government are taking these matters seriously and, as a result, acting appropriately.

Albert Owen: I wanted clarity from the Minister on the point the hon. Member for Angus raised about conversion from DC to AC current, because it is important. It will affect the whole of the United Kingdom, particularly with regard to three offshore developments that may be covered by contracts for difference, provided by the Bill, so it is important that those substation costs are in some way included. Will we have an opportunity to debate that as the Bill progresses? I do not consider that it has been covered by any part of the Bill thus far.

John Hayes: To some extent it will depend on the amendments tabled, but I welcome the opportunity to debate that specific issue. I am happy to acknowledge its significance, as the hon. Gentleman said, and with all due respect, I suggest that it may be one of the areas that we will want to explore in further scrutiny exactly as he said.

Barry Gardiner: It is rare that I rise to support the Minister on a point, but I hope that he will revel in it on this occasion. Today is the day when the memorandum of understanding on energy trading will be signed by the Secretary of State and Pat Rabbitte from the Republic of Ireland. The memorandum, as far as I understand it, addresses the market issues that the Minister spoke about.

John Hayes: Indeed. I mentioned the memorandum of understanding earlier in my remarks. I wonder if it would be useful to write to members of the Committee with details of that following this sitting. It is pertinent to the discussion.
With those remarks, I hope that the hon. Member for Angus will withdraw the amendment.

Michael Weir: I listened carefully to what the Minister said and I understand his point, but I still think that the proposal is an integral part of the issue of renewable energy and the move to CFDs. However, as it was intended to be a probing amendment, I will not push it to the vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed,That the clause stand part of the Bill.

Tom Greatrex: The clause is substantial and, while I do not wish to detain the Committee for too long, there are a couple of points that are worth exploring with the Minister in this important part of the Bill.
The clause is important in determining how CFDs will be allocated, which is understandably a live concern for investors and potential investors, and the wider industry. We heard last week evidence from Andrew Buglass for the Low Carbon Finance Group about the importance of that factor for driving investment. As I am sure the Minister will be aware, there is concern among smaller generators about the allocation process. A representative of Ecotricity expressed some of those concerns in evidence to us on 15 January.
As I have said several times about other aspects of the Bill, there is significant detail that is not available to us. We have been through the reasons for that a number of times. However, there is some detail in the policy documents. I welcome the Government’s explanation that projects in receipt of support under the renewables obligation or the small-scale feed-in tariff will not be eligible for CFDs. However, detail is still required on capacity.
One of the major considerations before a CFD is allocated will be the size in megawatts or gigawatts of the project that the developer intends to develop. Clause 13(4)(b) provides that targets will be set in relation to the generating capacity of electricity stations, but there is little detail on what those targets will be, and little idea of the Government’s direction of travel. The same applies to targets for the means by which electricity is to be generated.
Will there be a target for the nuclear capacity eligible for CFDs and how many offshore wind farms can access long-term contracts? As to the possible impact on carbon capture and storage, as the Minister has acknowledged in other exchanges, we both support it, but it is still being developed to become a commercially viable technology. I am sure he is aware of concern from those with an interest in CCS about not being able to take up CFDs because, given the time scale for developing the technology, the allocation process will have left them behind. What will take precedence—the capacity or the generation type? How will the mixture work? There is concern about the broad nature of clause 13, and if the Minister would say more I am sure that that would be welcome to many.
I should like clarity about subsection (4)(c):
“Provision made by virtue of subsection (1)(c) may include targets relating to…
(c) the geographical location of electricity generating stations.”
I have to admit that I was not quite clear about what that meant, so I looked at the explanatory notes, and they were not explanatory but repetitious. They did not seem to shed much further light.
I understand that there may be a case for targets relating to generation type and capacity, and I shall come on to those; but I am not sure that I understand targets relating to geography. The Minister, among others, in other contexts, has expressed personal concerns about the level of development of some technology types in some areas; but is it intended that there may be a moratorium—to take one part of the country almost completely at random—on wind farms in Lincolnshire, or a higher target for Cumbria to take one?
Perhaps the Minister will explain a little more about what the provision would mean, in practice, and how the responsibility will borne for setting and meeting those targets. Does it mean regional targets, or targets set by city, or land type—rural and urban?
I am sure that the Minister will acknowledge that the provision, which is very short, has the potential to create a great deal of wider debate, but also some concern and uncertainty for investors. If he can give some further elucidation than the accompanying explanatory notes do, many members of the Committee would welcome that.

John Hayes: The shadow Minister is right. This is an important part of the Bill, although not a contentious part. There are a number of things that I need to put on the record. The clause will enable the Secretary of State to set out the maximum cost of the CFD scheme by setting a financial cap on the ability of the system operator to issue CFDs, and enable the Secretary of State to direct the CFD counterparty not to issue CFDs if the Secretary of State determines that doing so would exceed the cost cap.
The clause would ensure that costs to consumers are controlled and that the CFD budget is not breached, supporting the Government’s objective of least-cost decarbonisation.
The Secretary of State would also be able to set targets, requiring the system operator to issue particular proportions of CFD support to particular types of generation. The shadow Minister drew attention to the specifics in the Bill in respect of subsection (4), and I will try to deal with those in the way that he wished me to. That might mean, as he said, the designation of particular technologies, including nuclear; the particular size of output—the point he made about capacity—technologies according to particular characteristics, such as whether they are intermittent, baseload or flexible; or technologies at a particular stage of development. His point about CCS is well made. CCS is a good example of an emerging or an innovative technology, and it is one in which we both take a great interest.
Targets determining generation mix may not be used initially. However, the use of such targets will be important in the context of technology-specific auctions where it will be necessary to cap the amount of a particular technology in order to facilitate effective competitive allocation. As the date of the move to technology-specific auctions is likely to differ by technology, the power needs to be flexible enough to allow for the budget to be split. Again, that is relevant to the point about innovative or emerging technologies.
Equally, as the shadow Minister described, there may be a need to provide a target to bring forward a set capacity of an emerging technology to encourage investment, or to restrain a technology, the costs of which are dropping swiftly, preventing consumers paying more than is necessary or desirable.
In order to ensure industry confidence in the process, it is our intention to ensure that we publish details of how the process is to work, the trigger points for changing between allocation processes and how costs are to be calculated for the purpose of staying within a budget. We will aim to use the delivery plan and the annual updates process to provide clear indications of the Government’s expectations as regards the amount of generation coming forward in each of the ways that I have described, all of which the shadow Minister asked me about.
The shadow Minister also asked me about the geography, which I will deal with briefly. If we in part deal with generating capacity outside the UK—we have just spoken about the memorandum of understanding that was signed today in respect of Ireland—it could perhaps add to our UK objective, so it needs to be included in the Bill. That is the principal aim of having geography listed in subsection (4)(c).
I will not be encouraged to say too much about the moratorium in Lincolnshire—it would require an act of God actually. It is not specifically about saying that there should be only one type of generation in one type of area. I hope that we would not want to countermand or override the normal planning process, which of course is the process in which those decisions are properly made.
As the clause allows limits on the cost of the CFD scheme to be imposed and determines how the scheme is controlled, to ensure that the Government achieve wider targets such as decarbonisation targets, we believe it is appropriate that Parliament should have a high level of control. Therefore any changes would be subject to the affirmative procedure, to ensure maximum transparency. I beg to move that the clause stand part of the Bill.

Question put and agreed to.

Clause 13 accordingly ordered to stand part of the Bill.

Clause 14  - Consultation

Michael Weir: I beg to move amendment 13, in clause14,page8,line21,after ‘consult’, insert ‘and agree with’.

Edward Leigh: With this it will be convenient to discuss the following:
Amendment 20, in clause14,page8,line33,at end insert—
‘(1A) In taking forward the requirement to consult under subsections (1)(a), (b) and (c), the Secretary of State shall—
(a) establish a Devolved Administration Consultation group, and
(b) make regulations for the scope, operation and outcomes from that Group.’.
Amendment 54, in clause14,page8,line33,at end insert—
‘(i) the Committee on Climate Change;
(j) the Panel of Technical Experts; and
(k) any person who is a holder of a licence to generate electricity under section 6(1)(d) of EA 1989.’.
Amendment 14, in clause14,page8,line34,leave out subsection (2).
Amendment 55, in clause14,page8,line34,leave out
‘as well as consultation after’.
Amendment 21, in clause14,page8,line35,at end add—
‘(3) Before making regulations under this Chapter or order under section 13, the Secretary of State must—
(a) take into account any representations made by the consultees under subsection (1)(a), (b) and (c),
(b) take into account any representations and discussions in the Devolved Administration Consultation group under subsection (1A), and
(c) publish a statement setting out whether and how the regulations or order under section 13 takes account of any representations made by the consultees under subsection (1)(a), (b) and (c).’.
Amendment 56, in clause16,page9,line33,leave out
‘as well as consultation after’.
Amendment 15, in clause16,page9,line33,leave out subsection (5).
Amendment 61, in clause19,page11,line38,at end insert—
‘( ) Before making Regulations under this section the Secretary of State must consult—
(a) the Authority;
(b) the national system operator;
(c) the Committee on Climate Change; and
(d) a consumer representative.’.
Amendment 64, in clause22,page12,line38,at end insert—
‘( ) Before imposing a requirement by virtue of subsection (1), the Secretary of State must consult—
(a) the Authority;
(b) the national system operator;
(c) the person by virtue of subsection (2) on whom requirements are imposed; and
(d) such other persons as the Secretary of State considers it appropriate to consult.
( ) Consultation may be satisfied only by consultation before the passing of this Act.’.
Amendment 66, in clause25,page14,line10,leave out
‘as well as by consultation after’.

Michael Weir: Amendments 13, 20, 14, 21 and 15 all stand in my name. At present, clause 14 provides for various bodies to be consulted before the Secretary of State makes regulations relating to contracts for difference. Among the consultees are the Scottish Ministers, the Welsh Ministers and the Northern Ireland Department of Enterprise, Trade and Investment, so all the devolved Administrations are to be consulted. But there is a problem, which seems to me to lie in the nature and extent of that consultation, and it is to those issues that my amendments relate.
As I indicated in an earlier debate, both the Scottish Government and the Northern Ireland Assembly have powers in relation to the existing renewables obligation and as such they can enter into different arrangements in respect of the operation of ROCs in Scotland and Northern Ireland. Both have done so to a certain extent. As the Bill stands at present, however, it seems to me that they will not have any powers to enter into different arrangements on CFDs in respect of their territories; the detail of the CFDs will be determined by the Secretary of State, whose only obligation is to consult with the various devolved Administrations along with a number of other statutory consultees.
I do not think that that is strong enough. I fully appreciate that the Department has been involved in consultations with the Scottish Government, and I presume with the other devolved Administrations, in the course of preparing the Bill, and that there will be ongoing discussions with them as the Bill progresses. However, that could be a fairly one-sided process, with no obligation on the Secretary of State to accept any of the advice or opinion proffered by the devolved Administrations, nor indeed any obligation for an ongoing process to ensure that there is continued consultation over what are very important matters.
My concern is heightened by the terms of subsection (2), which states:
“The requirement to consult may be satisfied by consultation before, as well as consultation after, the passing of this Act.”
The clear import of that is that any consultation or discussions that there may have been with the devolved Administrations to date would satisfy the terms of the clause, without the need for the Secretary of State to discuss anything further. I would remind the Committee, however, that throughout our discussions on the Bill we have commented on the lack of detail about the contracts for difference and how they will be framed or will work in practice.
I am sure that the consultations to date have been important and useful, but what happens when the Minister brings forward his much-trailed implementation document in the summer? We are told that that will contain the first indicative strike prices and more details about the implementation of CFDs, which are awaited with bated breath by the many developers and financiers involved in the industry. As it stands, there seems to me to be absolutely no duty on the Secretary of State to have any discussions with the devolved Administrations—let their alone agreement—on those important issues. Also, there will be no duty to ensure that the details of the subsequent secondary legislation—it appears there will be many pieces of secondary legislation should the Bill pass through the House—are even discussed with the devolved Administrations. Frankly, I do not think that is acceptable.
I am sure many members of the Committee are thinking, “Well, he is a nationalist, so he would say that,” but I urge Members to think of the bigger picture and the point made repeatedly in our previous sittings by the hon. Members for Southampton, Test and for Brent North about the lack of an industrial policy in connection with energy policy. Under the devolution settlement, much of the industrial policy is devolved and the devolved Administrations have a huge interest, not only on behalf of their domestic consumers but in developing and implementing industrial policy in energy policy. It is only right and proper that that policy should be the subject of detailed discussions and not summarily implemented by the Secretary of State.
My first amendment seeks to ensure that, as well as consulting, the Secretary of State must agree with the various statutory consultees before making regulations. That would require widespread and detailed discussions with all interested parties to ensure that the proposed regulations were accepted by all and able to be smoothly implemented. I concede that the danger there is that one consultee could hold up the process by refusing to agree, so my subsequent amendment 20 seeks to put an alternative process forward by setting up a devolved Administration consultation group, which would bring together representatives from each of the devolved Administrations with DECC to consult upon such matters. That would enable a more formal consultation process to be undertaken before any regulations are promulgated and would ensure that all the devolved Administrations had a full input into such important issues.
In order to be as all-encompassing as possible to all interests here, I have not even sought to ensure that agreement must be reached and, in paragraph (b), have left it open for regulations to be made on the operation of the group. That is perhaps a hostage to fortune, but I am sure that it would be possible to arrange it to everyone’s satisfaction. I understand that there is already an active ad hoc body between DECC and the Scottish Government to discuss specific issues regarding the island authorities, to which the Minister referred in response to my previous amendment.
Amendment 21 goes into more detail on the matter and again, in order to be as collegiate as possible, I have not sought any veto for one party over the discussions and decisions of the group, but have merely stated that the Secretary of State is required to take account of the representations made. He need not necessarily accept them, but must publish how they were taken account of—or, I suppose, not taken account of—in coming to the regulations’ content. That would have the additional benefit of making transparent what went on and the reasoning for coming to the decisions on the regulations.

Barry Gardiner: I just want some clarity. I take on board what the hon. Gentleman says about establishing the further group in amendment 20, but none the less he is still, as I understand it, proposing to proceed with amendment 13, which would force the Secretary of State not only to consult but to agree with Scottish Ministers, Welsh Ministers and so on. Is he proposing not to move that amendment? Will he clarify that, because it seems to vitiate all he said about not wanting to have the whole process held to ransom?

Michael Weir: I did say that I appreciated the difficulty with amendment 13 and it is not my intention to move it. I considered the matter in more detail and accept the hon. Gentleman’s point. With the more detailed amendment, I seek to put forward a process that would lead to discussion and transparency. As I was saying, the issue is with not just what we are doing now, but what we will be doing in future. We all appreciate that we are in the early stages of determining the content of contracts for difference and their various parts and that will continue at least for the remainder of this year, and I suspect for longer than that.

Edward Leigh: Order. For the sake of clarity, we are not now discussing amendment 13.

Michael Weir: I will not press amendment 13. I am now discussing amendments 20 and 21, and I may seek to press them to a vote.

Barry Gardiner: On a point of order, Mr Leigh. I seek your guidance. Given that amendment 13 is the first in this group, if that is being withdrawn, is it not the case that the others would fall with it?

Edward Leigh: No. It is perfectly in order for the hon. Member for Angus to discuss whatever amendments he wishes. To save the Minister and Committee a lot of time, it was important to establish where the debate lies. Clearly, we will not now discuss amendment 13.

Michael Weir: Thank you, Mr Leigh. I am sorry if I have caused confusion, but I did accept at the outset that there was a problem with amendment 13.
Such a group would have the added advantage that it could continue in being to ensure that as the process progresses—with the introduction of contracts for difference and the movement towards the transitional period and closure of ROCs—there could be continued formal consultation with the devolved Administrations, and an assurance that any concerns would be properly considered and a rational decision taken as to why they were not proceeded with.
I am sure that there are ongoing discussions between officials from DECC and the devolved Administrations on various aspects of electricity market reform and the delivery plan for CFDs, but the amendments would put that process on a statutory footing that would be more enduring as we move forward to some of the more challenging aspects of EMR, such as how National Grid exercises its functions as the delivery body. Embedding the amendments in legislation would focus the minds of all the Governments involved. They would understand that consultation needs to be serious and that they must work together to deliver proposals for reform that give confidence to everyone involved in the energy sector as we move to the new system. Such a route would go a long way to also introducing transparency and giving all parties clear understanding of and confidence in the process.

Tom Greatrex: I wish to speak to amendments 54, 55, 56 and 66, which are grouped with those of the hon. Member for Angus.
Given that the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) is not here, I suspect that the hon. Member for Angus and I are probably the only two in the room who have regular opportunities to read the Scottish press, particularly on a Sunday. We are both familiar with the fact that the Scottish Government are not shy in coming forward or raising their views with Government Departments. They often manage to do it, without even the cost of a stamp, through the good offices of The Sunday Post or The Scottish Mail on Sunday—often on the front page.
In my experience, from my previous life within Government, Government Departments work hard to accommodate and take into account the views of the devolved Administrations. I am not sure whether that has changed in the past two and a half years, but I suspect not. I accept many of the points that the hon. Member for Angus makes about the importance of consultation, particularly when setting up new arrangements that involve devolved responsibilities and impact directly on Scotland and Northern Ireland. I do not wish to say this too often, but I suspect that there is probably considerable consultation. Given the Joint Ministerial Committee and all the other structures in place, I wonder whether another structure is required. Perhaps what is required is more genuine engagement. It would probably solve some of the issues he seeks to address.
Amendment 54 adds three statutory consultees to the list in clause 14. I appreciate that there is always a temptation to add all manner of organisations to consultation lists—every statutory consultation list I see seems to be longer than the last—because there are interests that need to be taken into account. The amendment has by and large resisted that temptation. Paragraph (h) provides for the Secretary of State to consult any other persons he or she
“considers it appropriate to consult.”
That said, I believe there is scope to add an additional three bodies to the list, given their fundamental role in EMR and CFDs in particular.
First, we think it important that a panel of independent experts be consulted before making regulations under this chapter. As my hon. Friend the Member for Liverpool, Wavertree set out in detail during the debate before lunch on clause 7, there is an important role for an independent body to scrutinise various aspects of CFDs—most important of all, the strike price and its impact on consumers, but also various technical and legal aspects of the scheme. It makes sense therefore not only that such a body has a statutory underpinning for its existence, but that the Secretary of State must consult with it prior to passing CFD regulations.
Secondly, amendment 54 also seeks to add generators to the list of statutory consultees. I hope the Minister is able to shed a little light on the matter, as I am not sure whether it was deliberate or a drafting error, but generators do not appear to be on the list. Given the key role of generators in CFDs, it is difficult to understand why they would not be included. It is even more baffling when one considers that suppliers are statutory consultees, but not generators. I am sure that the Minister can explain that or, if it is simply an oversight, find a way to correct it in due course. I am also sure that there was no intention to exclude such a significant party from the consultation.
On amendment 54, we seek to add the Committee on Climate Change to the list of statutory consultees. The committee is an important statutory body set up under the Climate Change Act 2008, and it is a source of independent, impartial advice on meeting carbon targets. Given that the cut in carbon emissions is one of the key aims of EMR, it is important that that body is consulted in relation to CFDs.
Amendments 55, 56, and 66 are relatively minor, but important nevertheless, as they seek to ensure that consultation with statutory consultees is genuine and not consultation after the fact. As the Bill stands, a number of subsections state:
“The requirement to consult may be satisfied by consultation before, as well as consultation after, the passing of this Act.”
I understand that Ministers may have to act quickly in certain situations, which can make the duty to consult difficult, but that should be the exception rather than the rule. I also readily accept that the duty to consult should not bind the Secretary of State to act according to the views of consultees. Ministers should be free to seek advice or opinion, and then to disagree with it and act in an entirely different way. That is entirely reasonable, but after-the-fact consultation is not really consultation. It is seeking an opinion on an event that has taken place, rather than asking for a view that may well shape events.
The purpose of the clause, as I read it, is to seek the views of a wide range of organisations and bodies to ensure that the Secretary of State is informed before making regulations on CFDs or the capacity market. Will the Minister consider that point seriously? It may seem semantic, but it is not. It is important that consultation is—and is seen to be—genuine, for the wider acceptability of the Bill’s measures.

John Hayes: Obviously, I appreciate the opportunity to debate those aspects of the Bill. They relate to consultation, which I know all members of the Committee have an interest in. I assure the Committee that we attach great importance to consultation. We have already consulted widely on EMR, as hon. Members know, not only through the December 2010 consultation, but through a series of calls for evidence. Since I came to the Department in September, I have been surprised and pleased by the frequency with which DECC calls for evidence on a range of subjects, considers that evidence, and responds accordingly. It seems to be a model of good Government.
As hon. Members know, we have taken consultations seriously with the sector and with consumer representatives. We have established expert groups, and of course, we published a draft Bill. That was an example of where the Government made their intention clear in a White Paper, moved to a draft Bill, and then closely studied the responses to the Bill, including that of the Select Committee on Energy and Climate Change, which of course, considered the draft Bill and made recommendations, a number of which we accepted. The approach that the Government have taken to the reform has been highly consultative and it must continue to be, which is the point that lies behind the amendments.
By the way, we were not statutorily obliged to do anything that I just mentioned. None of it was part of our statutory duties, yet from the outset, we consulted our stakeholders and others to make sure that what we were proposing was right for consumers, investors and the environment. The changes to our proposals following consultation and scrutiny suggest that we have listened. I do not want to labour the point more than that, but I want to make it clear that the legislation has, from its genesis to what I might describe now as its adolescence—anticipating its maturity—been formed and shaped through full and frank discussion. The reason is that the Bill must be fit for the future and framed in a consensual way, and it must have the support of industry to make it work. It is about securing investment and infrastructure, and also about ensuring that the whole House recognises the significance of the change. We hope that it will last into the future, not for a party or a Parliament, but for the nation. Before I become too Churchillian, I will speak particularly to the amendments.
The hon. Member for Angus, understandably, made a case about the role of the devolved Administrations in the delivery of EMR. It is absolutely our intention that the dialogue that we already enjoy with those Administrations should continue, particularly with regard to their roles and responsibilities under the devolution arrangements on EMR. That is why the devolved Administrations are statutory consultees under clause 14, as he will have noted. The devolved Administration consultation group to which his amendment refers, and which I mentioned in our discussion a few moments ago, has already been established. It did not require the Bill or his amendment to do that. We just got on and did it. I say that with all due respect to him.
The Government’s intention in amendments 54, 61 and 64 is to ensure that parties affected by the making of regulations are properly consulted. Clauses 14 and 28 already require the Secretary of State to consult on the CFDs and capacity market regulations. As the shadow Minister said, certain bodies are specified as having a right of consultation. Others with an interest in the policy, although not necessarily as directly affected, will certainly be able to participate and should do so. For example, as he knows, we have committed to a full public consultation on capacity market policy later this year. As he also suggested, the Government retain flexibility to consult on the most appropriate timetable for development of timely implementation of policy. Hon. Members will be aware that it is usual for consultations on regulations made under an Act to take place both before the passing of the Act, and afterwards.
The hon. Member for Rutherglen and Hamilton West referred to a number of groups that he thought ought to be added, and the first was generators. He made a reasonable point. I simply say that we have already engaged with generators on the nature of the CFD mechanisms, and we will continue to do so. Ultimately, generators will be able to choose whether to apply for entry to a CFD on the basis of the terms set out, unlike suppliers. The Bill does not impose a requirement on them in quite the same way. It is right to continue to have that conversation with generators, and the hon. Gentleman is right that they are significantly important. But because of the difference in the architecture of the system, we will resist his overtures for having such statutory consultees. However, as he rightly said, the Secretary of State is empowered by the Bill to consult as needed.
On the point about the climate change committee—others have also made it—we are committed to the important role of the committee in providing support and advice to the Government. Its current statutory remit enables it to give advice to the Government on whether EMR is on track to meet carbon budgets, so it already has that power, and it will be able to respond to public consultation on that basis. It has a particular existing legal responsibility, and that is why it was not included on the list to which the hon. Gentleman referred.
In respect of the hon. Gentleman’s desire for continued discussion with the devolved Administrations, of course we want to have that discussion—indeed we are having it. It would be entirely wrong for us not to take account of the responsibilities that the devolved Administrations enjoy in that regard. It is a highly consultative approach—a listening Government. We would expect nothing less from the people’s Minister.

Michael Weir: The Minister has not addressed my point about subsection (2), about consultation before and after the passing of the Act. Can he comment on that? It concerns me that there does not seem to be a duty to continue consultation.

John Hayes: Forgive me, Chairman. Could the hon. Gentleman make that point again? I did not quite catch what he said.

Michael Weir: I asked the Minister to deal with my point about subsection (2), which states:
“The requirement to consult may be satisfied by consultation before, as well as consultation after, the passing of this Act.”
My concern is that a Government could—I am not saying that they would—say, “We consulted at the beginning of the process and we do not need to consult further.” I would like the Minister’s assurance, therefore, that that is not what the subsection says.

John Hayes: I can deal with that quickly. That is not our intention. We will certainly consult throughout the process, as the hon. Gentleman requests.

Michael Weir: I am not entirely convinced by what the Minister says. I appreciate that there has been a lot of consultation and that there will probably be more. I was going to say that I suspect I do not have much support on the Committee, but it might be that I have none, so I will not press the amendment to a vote. I beg to ask leave to withdraw the amendment.

Edward Leigh: Obviously the Churchillian rhetoric of the Minister had some effect.

Amendment, by leave, withdrawn.

Clause 14 ordered to stand part of the Bill.

Clause 15 ordered to stand part of the Bill.

Clause 16  - Licence modifications

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: Subsection (3) of clause 16 states:
“Provision included in a licence, or in a document or agreement relating to licences, by virtue of the power under subsection (1) may in particular include provision of a kind that may be included in regulations.”
That is probably a lawyer’s dream. I have read it a number of times and, although I do not often wish to advertise my ignorance, I do not understand what it means. I am sure that there is a simple and clear explanation, but given that the Bill and the explanatory notes are not particularly helpful in that regard, will the Minister, in his Churchillian way—

Edward Leigh: Order. Not too much of that please.

Tom Greatrex: Or in any other fashion, will the Minister explain what that means? The serious point is that the modification of a licence is an important act performed by the Secretary of State, and aside from a duty to consult there is no detail about how the Minister can be held to account for a modification or about whether he is obliged to report it to Parliament. Will the Minister outline what the procedure will be when the Secretary of State makes a licence modification for the purposes outlined in the clause, and what the obligations on the Secretary of State are to report such modifications? Those seem like a couple of minor points, but it would certainly help me, and I am sure other members of the Committee, if we were able to understand the provision better.

John Hayes: I am inclined to become Churchillian: never in the field of scrutiny have so few worked so hard to such noble purpose.
The regulations in the subsection that the hon. Gentleman claims he cannot grasp—I do not blame him for a moment—are CFD regulations. I will consider whether we should add “CFD” to make that clearer. I will take that away and think about it. That is a good point from a drafting point of view. If I had read that without the support of the advice I am able to draw on, I am not sure I would have necessarily gleaned that in the way that the hon. Gentleman does.
Clause 44 sets out the details that the hon. Gentleman referred to in the second part of his comments. With that I am happy to move on.

Alan Whitehead: I want to raise briefly, but on a wider basis, a number of points relating to the powers that the clause would give the Secretary of State with regard to licences. We could say the clause is the end of the beginning; it is certainly not the beginning of the end. The clause, at the end of the chapter relating to CFDs, would give the Secretary of State powers to modify
“a condition of a particular licence under section 6…of EA 1989”
and to make modification under subsection (1) for particular purposes, as well as require the Secretary of State to consult various people when so doing.
My puzzlement with this clause relates to the fact that the Secretary of State may modify those licences. In all legislation concerned with electricity markets and management of the markets it is quite clear on who modifies licences: that is, the authority, Ofgem. The Electricity Act 1989, referred to in clause 16(1), was modified by the provisions in the Utilities Act 2000. I have come across a clever device for ensuring that documents that I wish to refer to do not disappear in the new arrangements for the decc.gov.uk website. I have a bit of paper here, which works quite well, I find.
The provisions in the Utilities Act 2000 make it clear that the authority may grant a licence authorising a person to generate electricity. Section 35 makes it clear that
“the Authority may modify the standard conditions of licences of any type”.
The only point in that legislation in which the Secretary of State has a hand is in section 35(5):
“If…the Secretary of State directs the Authority not to make any modification, the Authority shall comply with the direction.”
That is the sole power that the Secretary of State has in that arrangement about the granting or modification of licences. Apparently, the Secretary of State can countermand, after the fact. The authority might have made a modification to a licence, and the Secretary of State can say, “No, that is a bad idea.” If the Secretary of State so defines, with certain parameters, that does not happen.
This clause, however, places that entire arrangement the other way round. The Secretary of State, for the purposes of CFDs, is able, in his or her own right, to modify particular licences. My puzzlement about the clause relates not only to the question of whether that is indeed a power too far for the Secretary of State in terms of what we have had for a long time as arrangements for granting and modification of licences, but to this question. If the clause were to become law, who would have primacy at that point in the modification of licences? I ask that because nowhere in the Bill are there any consequentials that repeal or modify those provisions in the Utilities Act 2000.
I looked in vain to see whether there were a number of consequentials. One would normally expect, at the end of a Bill, to see a number of clauses relating to repeals and modifications, but there is none, so the position appears to be that two different parties may both modify licences, and there does not appear to be any particular guidance or direction as to whose modification of what licence takes precedence. We therefore appear to have the position that there are two equal authorities relating to the modification of licences in this respect. Although it is true that the Secretary of State can subsequently come back to the authority and say, “You shouldn’t have modified that licence,” it is also the case that the Secretary of State may be in the position of saying to himself that he should not have modified a licence. That is according to the way the legislation appears to be set out at the moment.
My preferred view is that the Secretary of State should not have the power to modify a licence under this clause, because that appears to conflict with what has been the case for a very long time. But if the Secretary of State is to have a power to modify licences, I would have expected at the very least that the apparent confusion over who does what when, who has primacy and what should happen when someone does what, should be urgently clarified and legislation should be put forward that made that clear. If that does not happen, we are in a state of considerable continuing confusion. In line with the theme that we have been addressing throughout the proceedings on the Bill in Committee, one thing that is clearly very important in terms of the path forward for investors, confidence in the market and all those things, is that people know where they stand. I suggest that it is fairly clear that people potentially do not know where they stand.
Perhaps a detailed explanation will be put forward—[Interruption.] I think it might be about to. But in the absence of a detailed explanation, I hope that the Minister will take this point away, consider it, see whether there are problems that need rectifying and, if there are, ensure that suitable amendments can be brought forward before the Bill completes its passage, so that at least we have clarity, even if the Secretary of State has provided to himself powers that I personally think should not go in that direction.

John Hayes: As ever, the hon. Member for Southampton, Test makes an interesting point that adds value to our consideration. Of course, he is right that previous Acts did indeed give the Secretary of State the power to modify licences, and not just the one to which he referred, by the way. The answer to his fundamental question, therefore, is that the last modification would have legal force, so the primacy lies with this Bill should it become an Act. The flexibility for the Secretary of State to make such modifications in the course of the scheme is, I think we would all agree, necessary to ensure that account is taken of changes and that the settlement mechanism remains appropriate, in the light of those changes, over the life of the CFD. We do not, therefore, believe that that could be a time-limited power. The reason for that is that we understand that this is a dynamic process. I think that it was the hon. Member for Southampton, Test who said at an earlier stage of our scrutiny that this was the beginning of a journey, not the end. Of course, he is right. When he began his contribution, I thought of T. S. Eliot, who said:
“Time present and time past are both perhaps present in time future”.
Just to emphasise the fact that parliamentary scrutiny is critical to this matter, clause 44 provides that the Secretary of State may only make licence or code modifications if they are first laid before Parliament for 40 days and if neither House disapproves the measure during that time. That should ensure that appropriate parliamentary scrutiny will be exercised of this power. I have received some inspiration that allows me to inform my response more specifically. The most recent modification under either Act will take primacy. It does not necessarily have to be under this Bill, but under either Act. I want to put that on the record, so that it is entirely accurate.

Alan Whitehead: Notwithstanding that particular point about which piece of legislation takes primacy over another, which I take on board, is not it the case that one would expect that in terms of the clarification of where a particular piece of legislation stands in relation to another, there would be consequentials saying that this particular clause is repealed, discontinued or substituted by another clause? That is what one expects to see in such legislation and not an assumption that one piece of legislation has primacy over another, true though that may be. Is not it the case that in this particular piece of legislation, that is wholly absent?

John Hayes: I am not sure whether I agree with that. The hon. Gentleman knows very well, as you do Mr Leigh, that if an Act is replacing legislation, superseding earlier legislation, that would certainly be true. As I have told the Committee, the inspiration that winged its way to me as I was considering Eliot, is that the latest modification to a licence under either Act could apply, but I am not sure whether the standard mechanism that is often used in a Bill, which the hon. Gentleman identified, would, in these terms, apply. If I might just concede this point, it would have been very helpful for that to have been made crystal clear in the explanatory memorandum. I will take the matter away and think about whether I need to write to the Committee to reinforce the legal points that I have tried to make clear here as the basis of his inquiry. With that, given that
“in my beginning is my end”,
I will conclude so that we can make progress.

Question put and agreed to.

Clause 16 accordingly ordered to stand part of the Bill.

Clause 17  - Power to make electricity capacity regulations

Alan Whitehead: I beg to move amendment 28, in clause17,page10,line10,at end add—
‘(6) The national system operator shall not be designated so as to include any company or person that has interests in the national system that may come into conflict with their responsibilities as a national system operator.’.
I am sorry, Mr Leigh, it is me again. What I want to explore in this amendment is the consequence of the decision by the Government, effectively by fiat, to appoint National Grid as the system operator. Although we see the earliest mention of the system operator in clause 4, the existence of the system operator effectively is taken as read in the Bill. That is, there will be a system operator, who will have responsibility, among other things, for administering, providing and organising contracts for difference. We will be discussing later the role of the system operator with regard to capacity payments. The system operator therefore has a very substantial function—indeed, a central one—across the various provisions of the Bill.
It is instructive to look at the circumstances in which it was decided, when the Bill was brought about, not only that there should be a system operator having these particular powers and responsibilities, but also that the question of who should be the system operator should not be left till after this legislation had gone through the House, had concluded and was law.
One might have expected that, in other circumstances, this House would decide what the legislation that enables a system operator to come into being should look like and that subsequent to that legislation being passed, there would be a process of consultation to decide who or what the system operator should be. But on this occasion, it was announced—some 12 months ago—that there would be a system operator and that it would be National Grid. There has been consultation and discussion about that decision, but the decision was taken very much in advance of the Bill rather than subsequent to it.
That particular decision was one of the subjects considered by the Select Committee when it considered the pre-legislative scrutiny of the Bill. The Select Committee considered that it was potentially a bad idea; that to have National Grid as a system operator was potentially fraught with difficulty, not necessarily because National Grid would do anything terrible or was a body fundamentally unfit to manage the process, but because there would inevitably be substantial conflicts of interest. We need to be clear that National Grid is not a registered charity. It is not an administrative body set up for the convenience of organising the transmission of power across the country; it is a company. It is very successful, makes quite a lot of money and does a good job for its shareholders. It also does a good job in terms of organising not just the National Grid but a whole range of other things which are in the interests of the company to organise. For example, it has a substantial metering arm. Last year it organised something like 645,000 meter installations. So it has a substantial interest in meters and smart meters and the provision of them within the grid. It also has a substantial interest in interconnectors; it runs and has substantially constructed the BritNed interconnector. Yet as a system operator for the future, National Grid would have a substantial determination about whether, for example, capacity payments might be provided for interconnectors under this legislation. One might think that that could be a problem, or that it might be resolved.
National Grid has a substantial business interest in liquefied natural gas imports. Last year it developed further its Isle of Grain import terminal, so that by next year that terminal will have the capacity to import 20% of the UK’s gas demand, if required, through LNG imports. Again, with regard to its responsibilities as a system operator, it may have responsibility in the decision-making arrangement relating to capacity payments for gas provision. In the US, it has substantial interests in LNG storage, LNG road transportation, transmission pipelines, a number of gas fields and home energy services. At present it is in partnership with a company to install a low-emissions power station. Again, the system operator will have substantial powers to determine what power stations may get through the capacity market.
So, on the face of it, it appears that National Grid has a whole range of business interests that are not just of interest in this field but that are central to the issues of the Bill that we are discussing. Yet, well in advance of our discussions, the decision had been already made that National Grid should be the system operator, without any concerns being put forward about how those potential conflicts of interest might be mitigated or considered.
Here, as well as in other areas, it is fair to say—I underline this—that the Government looked at what the Energy and Climate Change Committee said about a number of provisions in the draft Bill, which became the Bill we have before us now. On that, the Government’s response to the Committee said:
“We are seeking powers in the Bill that will allow us to mitigate any conflicts of interest that come to light”.
They also said:
“We are also seeking powers in the Bill to be able to transfer the EMR delivery functions to another body should this ever be deemed necessary or desirable.”
That indicates an interesting transposition, as it were, to a post-hoc arrangement whereby a decision that had been made before the Bill could be changed after the Bill becomes law.
Later in the Bill we will discuss powers that the Government seek to take in respect of mitigation of conflicts of interest and those powers to be able to transfer EMR functions, but I have to say—I hope not to trespass too much on that discussion when those clauses come up—that the mitigation sought seems slight and the powers taken to transfer functions relate to failure of performance rather than conflict of interest in particular. Indeed, on both counts it appears that the powers sought by the Government under those sections may be undertaken only with the agreement of the company in the first place. That is not exactly a draconian measure to deal with conflicts of interest if they are seen to arise in an irresolvable way.
So we face a dilemma. I certainly think that there is a dilemma here. In a way, I understand why the Government decided—when they did—that they wanted National Grid to be the system operator; it was, effectively, the last man in the pub problem. We needed to make progress on electricity market reform; we needed to have a fairly clear line of action ahead. The option of setting up a new system operator arrangement or a new body to operate the system probably looked fairly complex at the time. One can imagine Ministers sitting with towels around their heads when the draft Bill came forward, thinking, “How are we going to deal with this? How are we going to make progress? Oh, I know, we’ll appoint National Grid. It’s a pretty good organisation. It looks like it would fulfil the aims of the Bill and it has extensive experience in this field.” So I can understand how that arrangement came about. However, that begs the question, is it the right arrangement in the long term for these new arrangements to flourish?
I accept that the position is marginally better now than it was before the Select Committee had a look at the draft Bill. The Bill now contains elements that will mitigate some of the concerns that were expressed about that decision. However, it is post hoc. It is not consideration at the time of the appointment; it is mitigating something that has already been done that should not have been done in the first place.
Consequently, my amendment seeks to make clear the circumstances in which a system operator can operate. If the amendment were passed, it might be possible for National Grid to divest itself of a number of its interests outside its system operator arrangements—its non-regulator businesses—to fit the circumstances set out in the amendment. On the other hand, if National Grid decided to continue just as it was, that would cause a problem. Perhaps that question should be put to National Grid. Across public life, people accept posts and divest themselves of other responsibilities in order to do so.
Is the Minister prepared to consider an arrangement to ensure that there are no conflicts of interest, or will he strengthen later clauses of the Bill that concern mitigation and the possibility that the Government will step in if the problems turn out to be irresolvable? If the Minister would do either of those things, I will be pretty solidly satisfied. Although I would be grateful if the Committee accepted my amendment, I might just be persuaded to withdraw it if the Minister said he would do that. I look forward to those considerations at a later date.

John Hayes: The hon. Gentleman has once again done the Committee a service by giving us the opportunity to explore this important matter. That should come as no surprise, because, as he rightly identified, it is something that the Select Committee highlighted during the pre-legislative scrutiny. I remind him that, at that point, National Grid told the Select Committee:
“Any conflicts of interest could be managed by applying business separation rules with oversight from Ofgem. Nick Winser (Executive Director, National Grid) argued that this would not be a challenge for the company because there are already parts of National Grid that operate in this way.”
There was an assurance then from National Grid that, for example, they would expect the information they received from EMR to be used only for EMR.
In a further communication sent last week as a supplementary memorandum to the Committee, National Grid emphasised,
“We have twenty years of experience in managing actual or perceived conflicts. Our licence obligations set out clearly what we can and cannot do”.
So National Grid is confident that this matter can be handled appropriately and has experience in doing so, which it has made available to us both in pre-legislative scrutiny and since we began this consideration in Committee. However, I agree with the hon. Gentleman that managing potential conflicts of interest is crucial to delivering the reforms we seek. He is right that the Government need to affirm why we think National Grid should be the delivery body for the capacity market, with common synergies between the system operator’s existing role in the economic and efficient running of the system, and its proposed future role, as he will know.
However it is important to emphasise that this role is essentially mechanistic. It is a technical role, not a policy-making role. It is not making decisions about the system. The Government will make those decisions and they, of course, are accountable to this House. This will be about technical analysis, which will inform that decision-making process, but it is not of itself a decision-making process. The other point that the hon. Gentleman made was a good one. I do not in any sense want to suggest that these are not both proper inquiries and important reasons to seek assurances from the Government.
It is important to point out that the interests in things like smart metering and in connection are already managed through the regulatory regime, through business separation, which Mr Winser referred to in the quote that I offered the Committee a moment ago. The hon. Gentleman will know that in clause 29 we have power to intervene, subject to an assessment with Ofgem. We are mindful of the issue of conflict of interest and we have put into place in the Bill measures to deal with it. He also raised the issue of the transferring of functions. It is the case that the functions could be transferred in the case of poor performance, and we would expect that performance to be properly assessed. If there were conflicts of interest, we could use the contingency powers in the Bill. No, we do not need the consent of the system operator to exercise that power to remove those functions.
In the end, the overarching power of Government to make policy and hold the system to account—after all, the Government are themselves accountable to this House—is reinforced by the measures that we are making our case for in this Committee and more widely.

Alan Whitehead: Does the Minister consider that the phrase “poor performance” might include failure properly to manage an organisation on the basis of a proper regard for conflicts of interest that might arise? The arrangements that have been suggested to separate the various functions of that company could be perceived, if they were breached, as poor performance in its own right.

John Hayes: The powers that I mentioned in clause 29 specifically give the ability to act if any potential conflict of interest is identified. Clause 30 confers a further power on the Secretary of State to transfer the delivery functions, in the way that I have just mentioned. Therefore clauses 29 and 30, as the hon. Gentleman wishes, give the power to act on conflicts of interests where they have been identified, and then to transfer functions. That is precisely the kind of protection that I was arguing has been put in the Bill, because we understand that a conflict of interest would be unacceptable and we would need to act quickly to deal with it.
Furthermore—this will give the hon. Gentleman perhaps even greater satisfaction—we are, in partnership with Ofgem, considering potential conflicts of interest and how they should best be mitigated and managed. I mentioned earlier that Ofgem is an intrinsic part of the process. We will take account of the outcome of that consultation as we finalise the design of the capacity market and, if shown to be necessary, we can use our powers in clause 29 to impose a business separation within National Grid’s own businesses.
Potential conflicts of interest have been raised, by the Select Committee and others, but National Grid is confident that any such situation could be handled effectively on the basis of its organisational structure and long experience. Furthermore, the Government recognise that they need to have the powers to act, should they need to, in the Bill.
Our discussions with Ofgem are ongoing, and our short debate this afternoon will help to inform those discussions. The Government are very clear that the synergies between the task that is required and the expertise of the National Grid are such that it is the best body to perform the function. Although I do not want to put words into the hon. Gentleman’s mouth, he has said that, in our shoes, he might well have come to the same conclusion. On that basis and with those assurances, I hope that he will withdraw his amendment, leaving it, if I may return to Eliot, as a “perpetual possibility”.

Alan Whitehead: I obviously do not wish to conclude the debate with a whimper rather than a bang—[ Interruption. ] That was also a bit of Eliot, but never mind. We can discuss the assurances that the Minister has given me later on, when we scrutinise the clauses relating to that mitigation. It is fair to say that I would not have started from here, in any event, but that is where we are. Let us hope that, on the basis of the Minister’s assurances plus our examination of the relevant parts of the Bill, we can come to a resolution about how the systems operator can work in the best interests of everybody. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Edward Leigh: With this it will be convenient to discuss new clause 2—Strategic reserve —
‘(1) The Secretary of State may by regulation introduce a system of strategic reserve of supply if he determines that the expense of maintaining a capacity market is detrimental to the continuing interests of either—
(a) security of supply, or
(b) energy customers.
(2) The Secretary of State may by regulation designate a nominated person to hold and manage the strategic reserve on his behalf (“the Strategic Reserve Operator”).
(3) A person is eligible to be designated if the person is—
(a) a company formal and registered under the Companies Act 2006, or
(b) a public authority, including any person whose functions are of a public nature.
(4) The Strategic Reserve Operator must contract with the System Operator for the circumstances under which the Strategic Reserve Operator supplies power to the System Operator.
(5) The Secretary of State must approve the drawing up of any contract between the System Operator and the Strategic Reserve Operator and may from time to time vary the terms of the contract should circumstances require.
(6) The Secretary of State must lay before Parliament a reasoned case for any change of content under subsection (5).
(7) Strategic Reserve regulations may make provision for payments to be made by electricity suppliers or capacity providers to a settlement body (see section 18(4)(g)) for the purposes of enabling the body—
(a) to meet such descriptions of its costs that the Secretary of State considers appropriate;
(b) to hold sums in reserve;
(c) to make payments to the Strategic Reserve Operator for the purpose of securing and operating strategic reserve capacity.’.

Alan Whitehead: I am just finding my notes.

Edward Leigh: I do not wish to rush you. We have already had T.S. Eliot, Winston Churchill, Henry VIII, Humpty Dumpty, Dr Johnson and Indiana Jones, and are now waiting for what is next.

Alan Whitehead: Proposed new clause 2 relates to the arrangements we would like for a capacity market. It does not ask the Committee to make a choice on the way to go with capacity markets, but would instead provide an opportunity, should problems arise with an arrangement in the Bill, for it to be revisited.
I put that idea forward in the light of what happened a while ago. I mentioned in discussion on the previous clause that a number of decisions relating to the over-arching architecture of the Bill were taken some while before the Bill arrived before the House. The decision made concerning capacity mechanisms related to a discussion on what form of capacity mechanism might be in the best interests of the country and customers, when thinking of introducing any form of capacity mechanism.
Perhaps I could expatiate briefly on the need for a capacity mechanism at all. If we are to move forward in a world where there is going to be a considerably larger penetration of renewable and low-carbon energy, a question arises about the extent to which the market as a whole is able to provide the capacity necessary, not just to keep the lights on, not just to ensure there is a sufficient capacity margin, but to ensure that the capacity margin consists of the right mix of electricity supply sources for the whole system.
The idea that there should be a capacity market or capacity payments at all relates to the extent to which the market, left to its own devices over a period of time, has the ability to bring forward all those new plants and arrangements that will give us security of capacity in future. Analysis suggests that there may be a problem in future of what is called “missing money”. That is, the market might fail by not having either the right amount of money to invest in new plant, or the confidence that the returns will be sufficient to invest that money in the first place.
The reason why there may be problems of confidence is that we are going to have replace a large amount of our plants over the next few years. Those plants will, by and large, have to be replaced by low-carbon plants and some less low-carbon plants. However, a substantial proportion will be of a low-carbon nature. It may be hard to credit, but the market has previously, frankly, worked on the basis of an overhang of investment in plant from the time of the Central Electricity Generating Board. That is possibly an over-investment in plant over a number of years, which means that there always has been a substantial operating margin in plant.
Indeed, over the last 10 years the energy market has worked on the assumption that as plant gets older and less efficient, it is not retired but just starts fading away. It moves to the margin of the market but it is still operational. It is still counted as capacity and it is able to come in at certain points when there is a particular peaking demand for electricity. That could be, to use an over-warm phrase, at half-time during a cup final when everyone switches the kettle on. There will be an enormous demand for electricity and the half-hour slots that the system operator has to require can then sell for a large amount of money.
It is therefore possible for such a plant to operate on the extreme margins, but still to be there and perhaps run for only a relatively few hours a year. In an instance that I looked at a while ago near my constituency, a plant was running for about 30 hours a year. It was still, as an amortised, very old plant, able to make sufficient money to stay in business on the basis of that small amount of generation per year. That will no longer be the case in future.
First, a number of plants have really come to the end of their life. However hard we wind them up they still do not work very well. Secondly, the provisions of the European large plant directive and the emissions performance directive mean that a number of plants can run for only a very limited amount per year without complying with those directives and therefore either have to run at a very reduced capacity or close. The decision in a number of cases has been that those plants will close. We will no longer have that overhang of plant that can work on the margins.
The question then is whether we replace plant on the basis of trying to keep those plants operating or—this is the curious problem for us—invest in plant that will never run. We could have new plant that would run for a very limited period in order to keep that capacity going. So what sort of capacity arrangements do we enter into? The choice that was in front of the Department some 12 or 13 months ago was whether to go with a system whereby we either keep some of that mothballed plant in operation or produce new plant that does not power very much. Recognising that neither of those possibilities is genuinely economic, we then put that plant outside the market as far as normal transactions are concerned, but keep it there in existence as a strategic reserve.
The market knows that that strategic reserve is there and that on occasions of considerable stress, it can come on stream. Because of the particular nature of the capacity, the mix that will be there and the question of renewable penetration, it is likely that over the next period the prices that will be achieved by energy companies for those half hours on the margins will be much higher than now. The suggestion in the impact assessment, which was one of the documents that disappeared off the DECC website, but which I have managed to find by other means, was that those prices would perhaps be £10,000 in future rather than about £1,000, which is the highest amount that has been achieved for that half-hour slot when there is a great deal of pressure on capacity. A strategic reserve would mean that the £10,000 would perhaps not be achieved, because the market would not go to that limit, as it would believe that the strategic reserve might come in. As for companies withholding capacity to try and get more money out of the system, a strategic reserve could also prevent gaming because they would know that the strategic reserve could be brought in at a particular point. That was one option in the impact assessment.
The other option was the capacity market, in which everybody gets some money for being on stream to offer power. That is what we find in the Bill and it is the choice that was made, but the problem is that that choice is much more expensive. It is twice as expensive over 20 years as the strategic reserve would be. Another problem is that it puts on bills about 10 times as much as a strategic reserve would. The impact assessment came out in favour of a capacity market as a whole, but not because of those figures. Almost at the end of the impact assessment, it stated:
“A Strategic Reserve has a number of advantages: it is relatively easy to implement and exit from; it is a well understood mechanism and so has relatively low policy design risk; and it is a small intervention in addition to the existing arrangements in the electricity market”.
It was still being praised right at the end of that impact assessment, and yet, literally on the very last page, it says, “Oh, we ought to go for a capacity market, because it has qualitative advantages over a strategic reserve.”
I think that is not right. The qualities that a strategic reserve offers—prices, security, it is relatively easy to operate, and it is proof against gaming in the market—stand out compared with a market-wide capacity payment arrangement. Nevertheless, that is what has been chosen. My new clause seeks to put back the option of going to a strategic reserve, should the Minister see that the way the capacity market is working is not efficient for customers or for security of supply. The Minister would have a relatively easy option.

Barry Gardiner: My hon. Friend the Member for Southampton, Test has given an absolutely brilliant exposition in support of his new clause. I only wish to add that he is offering the Minister a strategic reserve in addition to the policy that the Minister has advanced. It is absolutely essential that both of those options are available to a future Secretary of State and a future Government, and the Minister really should consider the new clause.

Alan Whitehead: I thank my hon. Friend for his words. He makes exactly the point I want to finish on. It would be wise for the Minister at least to consider seriously what options might be available to keep in play, within the legislation, those two possibilities for the future. The debate has not been concluded, by any means, by the impact assessments or the decisions that were made a year ago. It is essential that for the future, we have those options available to us. On that basis, I commend the new clause to the Minister, and I hope that he will at least take its principle on board, so that we can keep those options alive, for this Government and the next.

John Hayes: I am unsurprised once again that this matter has been raised, especially by the hon. Gentleman who has been consistent in making the case for a strategic reserve. I have an admission to make, even at this late stage in our consideration this afternoon, and I want to enliven the Committee with interesting episodes in my career as a Minister. When I came to the Department, I explored exactly the same questions as the hon. Gentleman is discussing. I wanted to be reassured that the capacity market mechanism was the best way of guaranteeing sufficient capacity to meet demand.
Let me say a word about why that matters and then I will address the amendment and the hon. Gentleman’s remarks in detail. I intend to do all that reasonably quickly so that we can make further progress. It matters because projections suggest that we are going to come under considerable strain in respect of capacity. There is no doubt about that.
Ofgem reported on such matters in a rather pessimistic way, but of course it did so by taking into account the an ageing generating stock, projections of likely demand, and the speed at which new generator capacity is likely to come on stream, so perhaps that pessimism is justified. It is certainly not out of step with the trend projections of my own Department. There are differences in detail, largely over marginal differences about the assessment of the role of interconnectors, but in essence the trend projections of Ofgem are very like our trend projections, and they suggest that particularly over the next decade we are going to come under considerable pressure in terms of capacity.
To some degree, the unanticipated fall in demand that has taken place in recent years is slightly flattering, if I might put it in those terms—around 15% spare capacity at present—but it is largely due to the decline in demand rather than the increase in supply. That is partly a reflection of the economy, of course. We cannot assume that that will last for ever and we would not want it to, as we are all committed to Britain doing well, and economic growth is part of that. So we are clear that additional capacity is necessary to deal with the potential shortfall. That will require replacing existing generating capacity, and the Government have set out a range of means for doing that without compromising our core commitment to a mixed generating resource, which I articulated earlier in our considerations.
We have already debated long-term contracted prices. CFDs are designed to encourage investor confidence to build the additional capacity that we need. There is also a consensus that we need an insurance policy—another mechanism to address the issue of capacity. The Government considered what the additional mechanism might look like and decided that it should be a capacity market mechanism. For the sake of clarity, that is an intervention in the electricity market designed to ensure that there is sufficient capacity to meet demand. The electricity market for many years has delivered high levels of reliability. People have understandably become used to that.
The mechanism by which we will achieve extra capacity above and beyond the investment that we hope to stimulate through the legislation will work by giving all electricity capacity providers who have entered into capacity agreements a steady payment to ensure that enough capacity is in place to meet demand and will impose penalties on holders of capacity agreements if they fail to deliver energy when needed.
Under the capacity market, a forecast will be made for the levels of capacity required and a competitive auction will be held to select capacity providers—parties who are able to provide reliable capacity in the delivery year. The providers will enter into a capacity agreement, which means that in the delivery year they will be required to provide capacity in return for a capacity payment.
The hon. Member for Southampton, Test asked whether we considered alternatives. I have already mentioned that I certainly challenged my Department to ensure that such alternatives had indeed been considered. He mentioned a strategic reserve of the kind that is used in Sweden. He would readily acknowledge that the consensus is that a capacity market is the most effective way of generating capacity, due to the way it balances the use of existing capacity with investment in new capacity. That is why France, for example, is considering a very similar model. We know from the experience of the US how such capacity markets have been run, and so have been able to gauge their effect and success. Having done so, we are confident that by providing the right incentives for investment, the capacity market is the most effective way to deliver security of supply to consumers and for that capacity to be delivered when needed.
I acknowledge that a strategic reserve can be effective in the short-term, but I am not sure that it offers the right long-term signals on security of supply. Experts across the academic community certainly seem to agree with that view. It is the view of National Grid and Ofgem, and largely the view of our industry stakeholders. Although I accept that there are nuances, it is in essence the view of many of those to whom I have spoken.
The new clause would allow us to have both a strategic reserve and a capacity mechanism. That might be the worst possible option, because it would send a confused signal to investors about the Government’s intentions. It is therefore neither fish nor fowl. There is an argument for going for a strategic reserve. The hon. Gentleman may tell me why it is not neither fish nor fowl.

Alan Whitehead: The new clause fairly clearly sets out that the Minister has the option of discontinuing a capacity market if in the opinion of the Minister it has turned out to provide poor value for customers, as I think it would, or has implications for security of supply. A Minister can take a view on that. It does not say that the two systems should run in parallel. It is a question of what system, in the Minister’s eventual view, is the best to secure security of supply and capacity at the least cost to customers and the country.

John Hayes: That is true. That is what the new clause says. I say that it is neither fish nor fowl, because of the signal it sends. The Minister taking a decision at a future point essentially delays the decision on which mechanism is used. That is less certain than the Government’s position, which says, “This is the mechanism we’re going to use and this is the timetable that we expect to use it in.” That is a clear signal about our intentions on capacity.

Barry Gardiner: With respect, the new clause does not delay it. I understand what the Minister says. His argument is that in order to incentivise the investment, we need to have the capacity market he has set out in the Bill. He has significantly failed to address all the points about gaming that my hon. Friend the Member for Southampton, Test brought up. The Minister knows, because he has seen it elsewhere in the world, that the markets are very good at gaming and ensuring that they get funds under the capacity market, rather than through the normal mechanism. New clause 2 would make it clear to the industry that gaming in that way would be dealt with robustly. It would therefore reduce the option for gaming.

John Hayes: Of course, the Bill provides the Minister with the option of discontinuing the capacity market should it become distorted in the way the hon. Gentleman suggests or not operate effectively, so there are powers to discontinue the capacity market if such gaming were to take place. I am pretty confident that the other elements of the Bill, the principal means by which we intend to incentivise investment and gain capacity, are sufficiently robust and attractive for the capacity market to be as I described: an insurance policy on capacity, not the principal means of delivery.

Barry Gardiner: And if the Bill already contains the means for the Secretary of Sate to abandon the capacity market, does it not make sense to include a mechanism whereby he can introduce something else, namely a strategic reserve? Is that not precisely what new clause 2 would do?

John Hayes: Except for the point that I have just made. New clause 2 would send a mixed message to the market about our intentions, possibly even driving up prices in the capacity market. Keeping options open in those terms might undermine confidence in the Government’s thinking and intentions. It is right that we keep a close eye on how the capacity market works, which I entirely acknowledge, but I am not sure we can start by saying, “We are going to have a capacity market mechanism, but we might have something else, too,” if we are trying to encourage sufficient confidence for people to invest in new capacity or, indeed, to participate in the capacity market process.

Barry Gardiner: The Minister has already conceded that the Bill, as presently constituted, gives the Secretary of State the ability to abolish the capacity market. That power, in itself, must undermine confidence in precisely the way the Minister suggests new clause 2 would do. The only difference is that, if new clause 2 stands part, the Secretary of State would have an option in reality, because there is something else to be put in place.

John Hayes: The hon. Gentleman may know that clause 22 gives the Secretary of State powers to intervene. His argument is that generators might signal intent to close down an existing plant earlier than is desirable to take capacity out of the system in order to bid in the capacity market and drive up the price as demand for capacity grows. I understand that point, which is why clause 22 specifically introduces powers for the Secretary of State to intervene in such a situation. It is important that we recognise the potential for gaming the system and anticipate it for the powers that we exercise. I entirely take that point.
I am not sure that one can make the argument stand up that we can run a successful capacity market auction on the basis that we might have a plan B; it is probably more important to be confident about plan A and to ensure that plan A works than to say, as the Opposition seem to be suggesting, that we keep all our options open. I am not sure that is the best or clearest way to encourage long-term investment.

Barry Gardiner: I really do not think that is the case. The Minister has invoked clause 22(3)(c):
“Requirements which may be imposed by virtue of subsection (1) include requirements relating to participation in a capacity auction”.
That is cutting our nose off to spite our face. What power does the Secretary of State actually have when somebody games? Well, he can say that they cannot provide the very capacity that we now need because of their bad behaviour. Being able to do that is not actually helping the Secretary of State; it is ensuring that the system is closed down and that he can be held to ransom.

John Hayes: The power is to apply those sanctions to a particular supplier, let us be clear about that.
Let us turn to the strategic reserve. The Government’s analysis is that the strategic reserve would, in the long term, undermine the market signals for both existing and new capacity by undermining revenue certainty. That would occur because of uncertainty over the conditions under which the strategic reserve will be deployed, which would significantly affect the revenues that other capacity providers receive from the energy market. Investors will be rightly concerned that, if the market does become tight and prices rise, the reserve would be deployed more frequently than anticipated, thus impacting on energy prices and reducing revenues for other market participants.
That uncertainty would create a strong incentive for existing plant to seek to join the reserve, creating not a “neither fish nor fowl” situation but a “slippery slope” effect where the reserve grows larger and larger in size and increasingly undermines the energy market. It would also affect decisions on the development of new capacity, by creating major uncertainty on long-term revenues. That is precisely the point I made about disincentivising investment in new capacity.

Alan Whitehead: Does the Minister accept that in the impact assessment to which he refers, the modelling on the strategic reserve was run on the base of the upper end of the price, at the edge of the market, precisely in order to take account of the problem of the slippery slope that would emerge if it was thought that the price were to be artificially depressed from the top end of that slope?

Edward Leigh: Okay, I only want brief interventions. Enough of slippery slopes, spirals and all the rest of it. Get on with it please, Minister.

John Hayes: I was about to say that the disincentive to invest is the antithesis of our intentions in respect of any of the approaches we may use to supplement capacity. In a sense, the strategic reserve is a sticking plaster, whereas the Government are proposing surgery—more radical repair of the capacity problem. Although a sticking plaster can sometimes come in useful for a grazed knee, I suspect that, if we got to the point where we felt that capacity was under the real pressure that it might be, what we might be dealing with would require rather more urgent, expert attention.
The other question that the hon. Gentleman has asked about previously is the relative costs of the capacity market and the strategic reserve. It does appear, certainly on first examination, that the strategic reserve would cost less, which is one of the reasons why I inquired about it when I first became Energy Minister. The estimated payments on the strategic reserve are around £350 million a year, whereas the capacity market payments are estimated to be around £2 billion a year. The cost of the capacity market, however, should be largely offset by the lower price in the electricity market that would result. The cost of the two mechanisms is, in fact, comparable.

Graham Jones: Does the Minister think that his argument lacks detail, or does he think that it is full, frank and comprehensive?

John Hayes: I would never say that my argument was lacking in detail. It is certainly coloured by a grasp of the great issues, but it is also informed by the detail necessary to make those issues persuasive, even to the most indiligent member of the Committee. I am delighted that the hon. Gentleman intervened on that basis.
The strategic reserve and the capacity market have been debated at length. The Government have come to their decision, which has been set out in the Bill, widely welcomed by the industry and, frankly, is by far the most likely mechanism to encourage the investment necessary to meet security of supply. Not wishing to delay the Committee any longer, on that basis I beg—beg is a strong word; I request that the hon. Gentleman withdraws his amendment. Knowing that he will want to move ahead with the alacrity that has been suggested by his colleague, I am confident that he will.

Edward Leigh: I make clear that we are not deciding on a new clause now, so we have effectively had a clause stand part debate. We will vote on new clause 2 later, if Dr Whitehead wishes it.

Question put and agreed to.

Clause 17 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Joseph Johnson.)

Adjourned till Tuesday 29 January at five minutes to Nine o’clock.